No-Additional-Cost Fringe Benefits
A company may provide services to employees on a tax-free basis and IRS bulletproof this benefit if it meets these conditions:
- The services are offered to customers in the ordinary course of business.
- The company doesn’t incur substantial additional cost in providing these benefits.
You could provide services at no additional cost, for example, when you have excess capacity.
Example 1: The Ship & Store Corporation provides air transit services and hotel rooms to customers. If there are some free spaces in the plane or some unoccupied hotel rooms, the corporation may provide these tax-free to its employees. The key to this fringe benefit is that the services offered are in the same line of business as the employer and normally are offered to non-employee customers.
Example 2: The Foolproof Bank offers car washes to non-employees in order to raise funds for charity. This is not the business of the bank, and free car washes provided to employees would not qualify as no-additional-cost fringe benefits.
Author’s note: Even if the employee agrees to reimburse the employer for the increased cost, this would not qualify as a tax-free fringe benefit. The following example illustrates this point.
Example 3: High-Cost Computer, Inc. (HCC), repairs computers. Jane is an employee with some big computer problems. HCC fixes her computer. The normal retail cost to fix it would have been $500 for labor and materials, but the actual out-of-pocket cost would have been only $100. Even if Jane reimburses HCC for the $100 cost, she would be taxed on the $400 of extra benefit. This is not a no-additional-cost benefit because HCC paid $100 to provide $500 worth of benefits. Jane’s reimbursement does not alter this fact.
Discrimination Toward Owners or Highly Compensated People Not Allowed
Sadly, you can’t discriminate in favor of highly compensated people or owners of the business who hold 5 percent or more of the stock.
The Bottom Line: For this benefit to be tax-free, the employer must not incur any extra cost, and the benefit provided must be the same services as provided to customers in the employer’s normal course of business.
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